Question

You are the CEO of a publicly traded company. The operating performance of your company has fallen below market expectations, which is reflected in a declining stock price. The CFO provides you with the following recommendations that are designed to increase your company's return on net operating assets (RNOA) and your operating cash flows, both of which will presumably result in improved financial performance and an increased stock price. 1. To improve net cash flow from operating activities, the CFO recommends that your company reduce inventories (raw material, work in progress, and finished goods) and receivables (through selective credit granting and increased emphasis on collection of past due accounts). 2. The CFO recommends that the company lengthen the time taken to pay accounts payable to increase net cash flows from operating activities. 3. The CFO recommends that you write off all assets deemed to be impaired and accrue excessive liabilities for future contingencies. The higher current period expense will result in higher future period income as the assets written off will not be depreciated and your company will have a liability account available to absorb future cash payments rather than recording them as an expense. 4. The CFO recommends that the company increase its estimate of expected return on pension investments. This will reduce pension expense and increase operating profit, a component of net operating profit after tax and, thus, of RNOA. 5. The CFO recommends that your company share ownership of its outbound logistics (trucking division) with another company in a joint venture. This would have the effect of increasing throughput, thus spreading overhead over a larger volume base, and would remove the assets from your company's balance sheet since the joint venture would be accounted for as an equity method investment. Evaluate each of these recommendations. In your evaluation, consider whether each recommendation will positively affect the operating performance of your company or whether it is cosmetic in nature.

You are the CEO of a publicly traded company. The operating performance of your company has fallen below market expectations, which is reflected in a declining stock price. The CFO provides you with the following recommendations that are designed to increase your company's return on net operating assets (RNOA) and your operating cash flows, both of which will presumably result in improved financial performance and an increased stock price.

1. To improve net cash flow from operating activities, the CFO recommends that your company reduce inventories (raw material, work in progress, and finished goods) and receivables (through selective credit granting and increased emphasis on collection of past due accounts).

2. The CFO recommends that the company lengthen the time taken to pay accounts payable to increase net cash flows from operating activities.

3. The CFO recommends that you write off all assets deemed to be impaired and accrue excessive liabilities for future contingencies. The higher current period expense will result in higher future period income as the assets written off will not be depreciated and your company will have a liability account available to absorb future cash payments rather than recording them as an expense.

4. The CFO recommends that the company increase its estimate of expected return on pension investments. This will reduce pension expense and increase operating profit, a component of net operating profit after tax and, thus, of RNOA.

5. The CFO recommends that your company share ownership of its outbound logistics (trucking division) with another company in a joint venture. This would have the effect of increasing throughput, thus spreading overhead over a larger volume base, and would remove the assets from your company's balance sheet since the joint venture would be accounted for as an equity method investment.

Evaluate each of these recommendations. In your evaluation, consider whether each recommendation will positively affect the operating performance of your company or whether it is cosmetic in nature.

Added by John S.

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